We want our customers to make the most of their money, both now and in the future.
If you have most of your money in low interest accounts your spending power could be slipping as prices rise faster than the value of your savings.
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Investments
The truth about inflation and investing your money
Inflation
Prices tend to go up over time. This is called inflation. It may sound like a concept that should be confined to the business section of the news.
But if you aren’t aware of inflation or how to try and combat it, you could end up with less money to spend on the things you want.
Effect of inflation over 10 years
According to the Bank of England inflation calculator, prices went up by an average of 3.1% a year between 2009 and 2018.
To keep up with inflation you would have needed to get an average return of 3.1% per year on your money otherwise its spending power would have reduced.
Losing out to inflation by a small percentage each year may not sound significant but if it’s repeated year after year you could end up worse off over time.
The inflation calculator suggests goods and services that cost £1,000 in 2008 cost £1,317 in 2018 - an increase in prices of almost a third over 10 years.
Cash savings accounts
If you need access to money quickly instant access cash savings accounts are excellent as the money is readily available. You should set aside enough money in accessible savings to cover any emergencies. An amount of around four times your essential monthly spending is usually about right.
Once you have built up an emergency fund, if you have other money available that you don’t need access to, it may be worth considering options other than cash savings accounts.
An option to consider
If you’re prepared to leave your money alone for 5 years or more, an investment could give you the opportunity for inflation-beating returns.
What happened between 2009 and the end of 2018
The FTSE 100 index follows the performance of the 100 largest companies that are listed on the stock market in the UK. If you had invested £1,000 through a Stocks and Shares ISA in an investment that copies the performance of the FTSE 100 at the start of 2009, your money would have been worth £2,213 at the end of 2018. That’s because the FTSE 100 with income reinvested returned about 121% over that time.*
So not only would you have preserved the spending power of your cash, you’d have added to it significantly.
*We’ve calculated this on the basis of returns from the FTSE 100, priced in pounds and including income from dividends as well as changes in the value of investments. The actual return could be a bit lower after paying any fees and could be different depending on how your money was invested. A fund like the ones we use for Royal Bank Invest, for example, would have delivered different performance over the same period.
When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not get back the amount of your original investment.
Why investments have done better against inflation
Investment funds can invest across different company shares. Companies tend to pass on price increases to their customers rather than let price increases contribute to a fall in profits. Higher profits can contribute to a higher share price.
The 2018 Barclays Gilt Equity study said a basket of shares had outperformed inflation by 5.1% per year between 1899 and 2017. Over the same period cash had outperformed inflation by 0.7% per year.
The tendency for companies to pass price increases on to customers is one reason shares have performed better against inflation over the long term than cash savings accounts.
Key reason to consider investing
The potential for investments to increase in value by more than inflation over the long term is a key reason for people to consider investing.
Every year that your investment increases in value by more than inflation could help you get wealthier. Over a long time small gains can compound into something bigger. In future it could mean more money for you to spend on holidays, more meals out or a more comfortable retirement.
If you hold your money in accounts or investments that consistently give you a lower return than inflation the opposite would happen. Over time you could end up worse off.
Investing does carry more risk than leaving your money in cash savings accounts. Investments may not keep up with inflation in future and they may fall in value. Cash savings accounts usually offer a known return at the outset whereas the return produced by investments is uncertain.
Royal Bank can help
Royal Bank Invest can help you try and combat the effects of inflation.
You can choose a fund yourself or get online automated advice. You can invest from £50, make monthly contributions and you can use your ISA allowance.
Eligibility criteria, fees and charges apply.
Experts decide the best places to invest your money. They invest in a low cost way and make sure your investment stays at a risk level you are comfortable with.
Tax reliefs referred to are those applying to UK residents under current legislation, which may change. The availability and value of any tax reliefs will depend on your individual circumstances.
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